Tag: Kim Jaewon (journalist)

This would all make an interesting movie – full of colorful characters, intense conflict, mounting tension, and stunning reversals – except for the fact that it’s all just too sprawling a story, with too many villains and, so far, no hero.

What are we talking about here? We’re talking about the large-scale corruption at the uppermost levels of the South Korean government and business sector that, in the last couple of years, has made for some high drama, complete with palace intrigue, smoking guns, and courtroom clashes. What is required here is a screenwriter who can tame this tale and foreground a single arresting plot line.

Park Geun-hye

But what to
foreground? OK, take a deep breath, here goes: in the brief period
since 2017, we’ve seen the removal from office – and long-term
imprisonment – of South Korea’s first female president (Park
Geun-hye) after she was caught doing underhanded deals, through her
shady best friend (Choi Soon-sil), with top business leaders – who,
as usual, went scot-free – and her replacement by a self-styled
“reform” president (Moon Jae-in), who, making bold promises to
rein in the power and corruption of the increasingly unpopular
chaebols – those massive, family-run conglomerates that dominate
that nation’s economy and that operate with impunity – installed
an antitrust czar (Kim Sang-jo), widely styled the “chaebol
sniper,” who started off his three-year term with a lot of tough
rhetoric about cutting Samsung, Hyundai, and other chaebols down to
size, only to tone down his language in recent months and talk,
instead, in pathetically humble language, about requesting modest
alterations in the chaebols’ organizational charts, even as the
president himself began getting all chummy with the chaebol leaders,
apparently having decided that he needed them on his side if he
wanted to kick his country’s weak economy back into high gear.

Moon Jae-in

Phew. So does
that mean we’re back at square one? Not exactly. Because, as we’ve
mentioned before, while President Moon and his “sniper” seem to
have dwindled into impotence and irrelevance, the cause has been
taken up by some of the people who actually own sizable chunks of the
chaebols but who, in keeping with the curious (indeed, unique)
traditions of the chaebols, have been systematically denied any
meaningful input into the governance of the conglomerates. The
bizarre fact, which remains unchanged, is that in most cases, the
families that founded the chaebols and that still hold the key
leadership positions in them don’t own a majority or even a
plurality of shares in those firms. Indeed, some of the chaebol royal
families would, under ordinary Western circumstances, be considered
negligible minority stockholders.

Choi Soon-sil

No surprise,
then, that as the South Korean economy falters and the chaebols,
immense though they are, look more and more as if their best years
are behind them, investors – most of them foreigners, many of them
Americans – who have plunged large sums of money into the chaebols
are increasingly frustrated at their own lack of power to initiate
significant changes. The unfortunate truth is that while the men who
founded the chaebols were business wizards, their children and
grandchildren, who now sit behind the big desks in the corner
offices, don’t necessarily have what it takes to run some of the
world’s largest corporations. Meanwhile, many of those investors
have proven track records at turning failing businesses around – at
spinning off or closing down certain subsidiaries, at recognizing the
need to hire or fire certain executives, and at successfully
restructuring extraordinarily diversified conglomerates to maximize
efficiency and profits.

Cho Yang-ho

So it is that, as Kim Jaewon of Nikkei reported on January 21, Korea Corporate Governance Improvement (KCGI), a newly founded South Korean activist fund that is now the second largest shareholder in the Hanjin Group (whose most famous holding is Korean Air), is pushing it to sell its hotel chain, which includes the Wilshire Grand Hotel in L.A. and the Waikiki Resort Hotel in Hawaii, and to form an independent committee that would select Hanjin’s CEO and other top leaders. Now that would be real reform – a change in policy that would actually make it possible to remove from office the scarifyingly rich and corrupt members of one of the chaebol royal families – in this case, the notorious Cho clan, which owns 29% of Hanjin – and replace them with new, competent, and even (could it be?) clean outsiders.

Cho Hyun-min

Such a transformation would mean the departure of company chairman Cho Yang-ho, who last year was indicted on embezzlement charges; of his wife, who has been probed for smuggling; of his daughter Cho Hyun-min, who was accused of assaulting an ad-agency executive; and of another daughter, Cho Hyun Ah, whose outrage at a flight attendant who served her macadamias in a bag and not on a plate led to a scandal and a legal mess that made headlines worldwide. In short, it’s a family that Hanjin, and South Korea generally, would be much better off without.

Bottom line: the
protagonists in this drama may turn out, in the end, to be these
so-called activist investors. Screenwriters, stay tuned.

The current
chapter in the history of the chaebols continues to develop
in exceedingly interesting ways.

Hyundai headquarters, Seoul

As we have
been discussing on a regular basis at this site in recent
weeks, these massive, heavily diversified, internationally
famous, and family-run conglomerates – which have dominated
the South Korean economy since shortly after the Korean War,
raising the nation up from indigence to prosperity even as
its government moved gradually closer to real democracy –
have hit on challenging times. Once engines of growth, the
chaebols are now barriers to further growth, so large and
powerful that they’re capable of crushing, with little
effort, the development of new firms and stifling the spirit
of entrepreneurship.

Samsung headquarters, Seoul

As a result,
in South Korea there is hardly any way to make a
respectable career in business other than to find a job at
one of the chaebols. And however talented and motivated one
may be, there is no way to rise to the very top of one
of the chaebols unless one happens to have been born into
the right family. This state of affairs has led to growing
resentment toward the chaebols – a resentment intensified
by the corrupt ties between the chaebol dynasties and the
country’s political elites, and, perhaps most bizarre of
all, by the fact that the people who hold tight to the
reins of power in these conglomerates are not necessarily
the same people who own the lion’s share of their stock.
On the contrary, it is rare indeed for the stockholders in
the chaebols to have much say at all in their actual
management.

Moon Jae-in

As we’ve discussed here, and as Kim Jaewon noted in a recent article for Nikkei, South Korean Moon Jae-in, upon his inauguration in May 2017, promised major chaebol reform. To be sure, it is a tradition for newly installed South Korean presidents to vow chaebol reform. But Moon spoke so insistently about the matter that he persuaded a good many citizens of his country that he really meant to do something. As the weeks and months have gone by since he took power, however, fewer and fewer have looked upon his assurances with confidence; and, as the usual arrests for corruption have taken place, followed by the usual pardons for the chaebol executives involved and the usual prison terms for the politicians, once again cynicism about the chaebols has been on the upswing.

Lee Kung-hee, chairman of Samsung Electronics

It is in this atmosphere that a few bold chaebol shareholders are finally standing up to the perverse power arrangement that they have quietly accepted for so long. These activist investors, observed Jaewon, “have scored minor victories at Samsung and Hyundai, while the parent of Korean Air Lines has been called to account by a domestic fund.” At the head of the list of these investors, wrote Jaewon, is the New York-based Elliott Management, the world’s largest activist fund, which has been campaigning “to force Samsung Electronics and Hyundai Motor to increase shareholder returns.”

Hyundai Motor Chairman Chung Mong-koo

This campaign
by activist investors has already begun to bear fruit. In
early December, Samsung Electronics “retired 7% of its
common stock and 8.9% of its preferred stock worth 4.9
trillion won ($4.4 billion)” in an effort to provide
shareholders with greater benefits. Hyundai Motor recently
announced plans to “buy 2.8 million treasury shares worth
254.7 billion won by the end of February to boost its
stock price and shareholders’ value.” In December, it even
took the action – surprising within a South Korean context
– of “promoting several foreign executives to senior
roles, a first step toward the management diversification
long demanded by minority shareholders.”